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Prize Lecture

Most of the people in the world are poor,
so if we knew the economics of being poor, we would know much of
the economics that really matters. Most of the world's poor
people earn their living from agriculture, so if we knew the
economics of agriculture, we would know much of the economics of
being poor.

People who are rich find it hard to
understand the behaviour of poor people. Economists are no
exception, for they too find it difficult to comprehend the
preferences and scarcity constraints that determine the choices
that poor people make. We all know that most of the world's
people are poor, that they earn a pittance for their labor, that
half and more of their meager income is spent on food, that they
reside predominantly in low income countries and that most of
them are earning their livelihood in agriculture. What many
economists fail to understand is that poor people are no less
concerned about improving their lot and that of their children
than rich people are.

What we have learned in recent decades
about the economics of agriculture will appear to most reasonably
well informed people to be paradoxical. We have learned that
agriculture in many low income countries has the potential
economic capacity to produce enough food for the still growing
population and in so doing can improve significantly the income
and welfare of poor people. The decisive factors of production in
improving the welfare of poor people are not space, energy and
cropland; the decisive factor is the improvement in population
quality.

In discussing these propositions, I shall
first identify two intellectual mistakes that have marred the
work of many economists. I shall then point out that most
observers overrate the economic importance of land and greatly
underrate the importance of the quality of human agents. Lastly I
shall present measurements of the increases in population quality
that low income countries are currently achieving.

Much of what I have learned about these
propositions I owe to the research of predoctoral and
postdoctoral students, to subsequent studies during their
professional careers, and to my academic colleagues. In recent
decades their work has produced a veritable explosion in the
understanding of the economics of human capital, with special
reference to the economics of research, the responses of farmers
to new profitable production techniques, the connection between
production and welfare, and the economics of the family.

Mistakes by economists
This branch of economics has suffered from several intellectual
mistakes. The major mistake has been the presumption that
standard economic theory is inadequate for understanding low
income countries and that a separate economic theory is needed.
Models developed for this purpose were widely acclaimed until it
became evident that they were at best intellectual curiosities.
The reaction of some economists was to turn to cultural and
social explanations for the alleged poor economic performance of
low income countries. Quite understandably, cultural and
behavioral scholars are uneasy about this use of their studies.
Fortunately, the intellectual tide has begun to turn. Increasing
numbers of economists have come to realize that standard economic
theory is just as applicable to the scarcity problems that
confront low income countries as to the corresponding problems of
high income countries.

A second mistake is the neglect of economic
history. Classical economics was developed when most people in
Western Europe were very poor, barely scratching out subsistence
from the poor soils they tilled and they were condemned to a
short life span. As a result, early economists dealt with
conditions that were similar to those that prevail in low income
countries today. In Ricardo's day about half of the family income
of laborers in England went for food. So it is today in many low
income countries. Marshall (1920) tells us that "... English
labourers' weekly wages were often less than the price of a half
bushel of good wheat", at the time that Ricardo published his
classic work. The weekly wage of the ploughman in India is
currently somewhat less than the price of two bushels of wheat
(Schultz, 1977a, 1977b). In India many people live under the
Ricardian shadow. Understanding the experience and achievements
of poor people over the ages can contribute much to understanding
the problems and possibilities of low income countries today.
That kind of understanding is far more important than the most
detailed and exact knowledge about the surface of the earth, or
of ecology, or of tomorrow's technology.

Historical perception is also lacking with
respect to population. We extrapolate global statistics and are
horrified by our interpretation of them, mainly that poor people
breed like lemmings headed toward their own destruction. Yet that
is not what happened looking back at our own social and economic
history when people were poor. It is equally false with respect
to population growth in today's poor countries.

Land is overrated
A widely held view - the natural earth view - is that there is a
virtually fixed land area suitable for growing food, and a supply
of energy for tilling the land that is being depleted. According
to this view, it is impossible to continue to produce enough food
for the growing world population. An alternative view - the
social-economic view - is that man has the ability and
intelligence to lessen his dependence on cropland, on traditional
agriculture and on depleting sources of energy and can reduce the
real costs of producing food for the growing world population. By
means of research we discover substitutes for cropland, which
Ricardo could not have anticipated, and as incomes rise parents
reveal a preference for fewer children, substituting quality for
quantity of children, which Malthus could not have foreseen. It
is ironic that economics, long labelled the dismal science, is
capable of showing that the bleak natural earth view for food is
not compatible with economic history; that history demonstrates
that we can augment resources by advances in knowledge. I agree
with Margaret Mead: "The future of mankind is open ended."
Mankind's future is not foreordained by space, energy and
cropland. It will be determined by the intelligent evolution of
humanity.

Differences in the productivity of the
soils is not a useful variable to explain why people are poor in
long-settled parts of the world. People in India have been poor
for ages both on the Deccan Plateau where the productivity of the
rain-fed soils is low, and on the highly productive soils of
South India. In Africa, people on the unproductive soils of the
southern fringes of the Sahara, on the somewhat more productive
soils on the steep slopes of the Rift landform, and on the highly
productive alluvial lands along and at the mouth of the Nile, all
have one thing in common: they are very poor. Similarly, the much
publicized differences in land-population ratio throughout the
low income countries do not produce comparable differences in
poorness. What matters most in the case of farmland are the
incentives and associated opportunities that farm people have to
augment the effective supply of land by means of investments that
include the contributions of agricultural research and the
improvements of human skills.

A fundamental proposition documented by
much recent research is that an integral part of the
modernization of the economists of low income countries is the
decline in the economic importance of farmland and a rise in that
of human capital - skills and knowledge.

Despite economic history, scratch an
economist and you will find that his ideas about land are still,
as a rule, those of Ricardo. But Ricardo's concept of land, "the
original and indestructible powers of the soil", is no longer
adequate, if ever it was. The share of national income that
accrues as land rent and the associated social and political
importance of landlords have declined markedly over time in high
income countries and they are also declining in low income
countries. Why is Ricardian Rent losing its economic sting? There
are two primary reasons: first, the modernization of agriculture
has over time transformed raw land into a vastly more productive
resource than it was in its natural state, and second,
agricultural research has provided substitutes for cropland. With
some local exceptions, the original soils of Europe were poor in
quality. They are today highly productive. The original soils of
Finland were less productive that the nearby western parts of the
Soviet Union, yet today the croplands of Finland are superior.
Japanese croplands were originally much inferior to those in
Northern India; they are greatly superior today. Some part of
these changes, both in high and in low income countries, is the
consequence of agricultural research including the research
embodied in purchased agricultural inputs. There are new
substitutes for cropland (call it land augmentation if you so
prefer). The substitution process is well illustrated by corn.
The corn acreage harvested in the United States in 1970 was 33
million acres less than in 1932. Yet the 7.59 billion bushels
produced in 1979 was three times the amount produced in 1932.

The quality of human agents is
underrated
While land per se is not a critical factor in being poor,
the human agent is: investment in improving population quality
can significantly enhance the economic prospects and the welfare
of poor people. Child care, home and work experience, the
acquisition of information and skills through schooling and in
other ways consisting primarily of investment in health and
schooling, can improve population quality. Such investments in
low income countries have, as I shall show, been successful in
improving the economic prospects wherever they have not been
dissipated by political instability. Poor people in low income
countries are not prisoners of an ironclad poverty equilibrium
that economics is unable to break. There are no overwhelming
forces that nullify all economic improvements causing poor people
to abandon the economic struggle. It is now well documented that
in agriculture poor people do respond to better
opportunities.

The expectations of human agents in
agriculture - farm laborers and farm entrepreneurs who both work
and allocate resources - are shaped by new opportunities and by
the incentives to which they respond. These incentives are
explicit in the prices that farmers receive for their products
and in the prices they pay for producer and consumer goods and
services that they purchase. These incentives are greatly
distorted in many low income countries (Schultz, 1978b). The
effect of these government induced distortions is to reduce the
economic contribution that agriculture is capable of making.

The "reason" why governments tend to
introduce distortions that discriminate against agriculture is
that internal politics generally favor the urban population at
the expense of rural people, despite the much greater size of the
rural population.1 1 The political
influence of urban consumers and industry enables them to exact
cheap food at the expense of the vast number of poor rural
people. This discrimination against agriculture is rationalized
on the grounds that agriculture is inherently backward and that
its economic contribution is of little importance despite the
occasional "green revolution". The lowly cultivator is viewed as
indifferent to economic incentives because it is presumed that he
is strongly committed to his traditional ways of cultivation.
Rapid industrialization is viewed as the key to economic
progress. Policy is designed to give top priority to industry,
which includes keeping food grains cheap. It is regrettable but
true that this doctrine is still supported by some donor agencies
and rationalized by some economists in high income countries.

Entrepreneurs
Farmers the world over, in dealing with costs, returns and risks,
are calculating economic agents. Within their small, individual,
allocative domain they are fine-tuning entrepreneurs, tuning so
subtly that many experts fail to recognize how efficient they
are. I first presented an analysis of this entrepreneurial
behaviour in Transforming Traditional Agriculture
(Schultz, 1964). Although farmers differ for reasons of
schooling, health and experience in their ability to perceive, to
interpret and to take appropriate action in responding to new
information, they provide an essential human resource which is
entrepreneurship (Welch, 1970, 1978; Evenson, 1978). On most
farms there is a second enterprise, the household. Women are also
entrepreneurs in allocating their own time and in using farm
products and purchased goods in household production (Schultz,
1974). This allocative ability is supplied by millions of men and
women on smallscale producing units; agriculture is in general a
highly decentralized sector of the economy. Where governments
have taken over this function in farming, they have prevented
this entrepreneurial talent from being used and these governments
have been unsuccessful in providing an effective allocative
substitute, capable of modernizing agriculture. The allocative
roles of farmers and of farm women are important and their
economic opportunities really matter (Schultz, 1978b).

Entrepreneurship is also essential in
research. All research is a venturesome business. It entails
allocating scarce resources. It requires organization. Someone
must decide how to allocate the limited resources available for
research given the existing state of knowledge. The very essence
of research is that it is a dynamic venture into the unknown or
partially known. Funds, organizations and competent scientists
are necessary. They are not sufficient. Research entrepreneurship
is required, be it by scientists or by others engaged in the
research sector of the economy (Schultz, 1979c).

Inevitability of disequilibria
The transformation of agriculture into an increasingly more
productive state, a process that is commonly referred to as
"modernization", entails all manner of adjustments in farming as
better opportunities become available. I have shown that the
value of the ability to deal with disequilibria is high in a
dynamic economy (Schultz, 1975).

Such disequilibria are inevitable.
They cannot be eliminated by law, by public policy, and surely
not by rhetoric. Governments cannot perform efficiently the
function of farm entrepreneurs.

Future historians will no doubt be puzzled
by the extent to which economic incentives were impaired during
recent decades. The dominant intellectual view is antagonistic to
agricultural incentives and the prevailing economic policies
deprecate the function of producer incentives. For lack of
incentives the unrealized economic potential of agriculture in
many low income countries is large (D. Gale Johnson, 1977, 1978).
Technical possibilities have become increasingly more favorable,
but the economic incentives that are required for farmers in
these countries to realize this potential are in disarray, either
because the relevant information is lacking or because the prices
and costs they face have been distorted. For want of profitable
incentives, farmers have not made the necessary investments,
including the purchase of superior inputs. Interventions by
governments are currently the major cause of the lack of optimum
economic incentives.

Achievements in population
quality
I now turn to measurable gains in the quality of both farm and
nonfarm people (Schultz, 1979a, 1979b). Quality in this context
consists of various forms of human capital. I have argued
elsewhere (Schultz, 1974) that while a strong case can be made
for using a rigorous definition of human capital, it will be
subject to the same ambiguities that continue to plague capital
theory in general and the capital concept in economic growth
models in particular. Capital is two-faced, and what these two
faces tell us about economic growth, which is a dynamic process,
are, as a rule, inconsistent stories. It must be so because the
cost story is a tale about sunk investments, and the other story
pertains to the discounted value of the stream of services that
such capital renders, which changes with the shifting sands of
growth. But worse still is the capital homogeneity assumption
underlying capital theory and the aggregation of capital in
growth models. As Hicks (1965) has taught us, the capital
homogeneity assumption is the disaster of capital theory. This
assumption is demonstrably inappropriate in analyzing the
dynamics of economic growth that is afloat on capital
inequalities because of the differences in the rates of return,
whether the capital aggregation is in terms of factor costs or in
terms of the discounted value of the lifetime services of its
many parts. Nor would a catalogue of all existing growth models
prove that these inequalities are equals. But why try to square
the circle? If we were unable to observe these inequalities, we
would have to invent them because they are the mainspring of
economic growth. They are the mainspring because they are the
compelling economic signals of growth. Thus, one of the essential
parts of economic growth is concealed by such capital
aggregation.

The value of additional human capital
depends on the additional wellbeing that human beings derive from
it. Human capital contributes to labor productivity and to
entrepreneurial ability. This allocative ability is valuable in
farm and nonfarm production, in household production, and in the
time and other resources that students allocate to their
education. It is also valuable in migration to better job
opportunities and to better locations in which to live. It
contributes importantly to satisfactions that are an integral
part of current and future consumption.

My approach to population quality is to
treat quality as a scarce resource, which implies that it has an
economic value and that its acquisition entails a cost. In
analyzing human behavior that determines the type and amount of
quality that is acquired over time, the key to the analysis is
the relation between the returns from additional quality and the
costs of acquiring it. When the returns exceed costs, the stock
of population quality will be enhanced. This means that increases
in the supply of any quality component is a response to a demand
for it. It is a supply-demand approach to investment behavior
because all quality components are here treated as durable scarce
resources that are useful over some period of time.

My hypothesis is that the returns to
various quality components are increasing over time in many low
income countries; the rents that entrepreneurs derive from their
allocative ability rise, so do the returns to child care,
schooling, and improvements in health. Furthermore, the rates of
return are enhanced by the reductions in the costs of acquiring
most of these quality components. Over time the increases in the
demand for quality, in children and on the part of adults in
enhancing their own quality, reduces the demand for quantity;
that is, quality and quantity are substitutes and the reduction
in demand for quantity favors having and rearing fewer children
(Becker and Tomes, 1976; Rosenzweig and Wolpin, 1978). The
movement toward quality contributes to the solution of the
population "problem".

Investment in health
Human capital theory treats everyone's state of health as a
stock, i.e., as health capital, and its contribution as health
services. Part of the quality of the initial stock is inherited
and part is acquired. The stock depreciates over time and at an
increasing rate in later life. Gross investment in human capital
entails acquisition and maintenance costs. These investments
include child care, nutrition, clothing, housing, medical
services, and the use of one's own time. The flow of services
that health capital renders consists of "healthy time", or
"sicknes-free time", which are inputs into work, consumption and
leisure activities (Williams, 1977; Grossman, 1972).

The improvements in health revealed by the
longer life span of people in many low income countries has
undoubtedly been the most important advance in population
quality. Since about 1950, life expectancy at birth has increased
40 percent or more in many of these countries. People of Western
Europe and North America never attained so large an increase in
life expectancy in so short a period. The decline in mortality of
infants and very young children is only a part of this
achievement. The mortality of older children, youths and adults
is also down.

Ram and Schultz (1979) deal with the
economics of these demographic developments in India. The results
correspond to those in other low income countries. In India from
1951 to 1971, life expectancy at birth of males increased by 43
percent, and that of females by 41 percent. Life spans over the
life cycle after age 10, 20 and on to age 60, for both males and
females in 1971, were also decidedly longer than in 1951.

The favorable economic implications of
these increases in life span are pervasive. Foremost are the
satisfactions that people derive from longer life. While they are
hard to measure, there is little room for doubt that the value of
life expectancy is enhanced. Measurement, however, is not
impossible. Usher (1978) devised an ingenious extension of theory
to determine the utility that people derive from increases in
life expectancy. His empirical analysis indicates that the
additional utility increases substantially the value of personal
income.

Longer life spans provide additional
incentives to acquire more education, as investments in future
earnings. Parents invest more in their children. More on-the-job
training becomes worthwhile. The additional health capital and
the other forms of human capital tend to increase the
productivity of workers. Longer life spans result in more years
participation in the labor force, and bring about a reduction in
"sick time". Better health and vitality of workers in turn lead
to more productivity per manhour at work.

The Ram-Schultz study provides evidence on
the gains in the productivity of agricultural labor in India,
realized as a consequence of improvements in health. The most
telling part of that evidence is the productivity effect of the
cycle that has characterized the malaria program.

Investment in education
Education accounts for much of the improvements in population
quality. But reckoning the cost of schooling, the value of the
work that young children do for their parents must be included.
Even for the very young children during their first years of
school, most parents forego (sacrifice) the value of the work
that children perform (Makhija, 1977; Shortlidge, 1976;
Rosenzweig and Evenson, 1977). Another distinctive attribute of
schooling is the vintage effect by age over time. Starting from
widespread illiteracy, as more schooling per child is achieved,
the older adults continue through life with little or no
schooling, whereas the children on entering into adulthood are
the beneficiaries.

The population of India grew about 50
percent between 1950-51 and 1970-71. School enrollment of
children ages 6 to 14 rose over 200 percent. The rate of increase
in secondary schools and universities was much higher (Government
of India, 1978). Since schooling is primarily an investment, it
is a serious error to treat all schooling outlays as current
consumption. This error arises from the assumption that schooling
is solely a consumer good. It is misleading to treat public
expenditures on schooling as "welfare" expenditures, and as a use
of resources that has the effect of reducing "savings". The same
error occurs in the case of expenditures on health, both on
public and private account.

The expenditures on schooling including
higher education are a substantial fraction of national income in
many low income countries. These expenditures are large
relative to the conventional national accounting measures
(concepts) of savings and investment. In India the proportion
that the costs of schooling bear to national income, savings and
investment is not only large but it has tended to increase
substantially over time (Ram and Schultz, 1979, pp. 410-12 and
Table 2).

The highly skilled
In assessing population quality, it is important not to overlook
the increases in the stock of physicians, other medical
personnel, engineers, administrators, accountants, and various
classes of research scientists and technicians (Schultz,
1979d).

The research capacity of a considerable
number of low income countries is impressive. There are
specialized research institutes, research units within
governmental departments, industrial sector research, and
on-going university research. The scientists and technicians
engaged in these various research activities are university
trained, some of them in universities abroad. The research areas
include, among others, medicine, public health (control of
communicable diseases and the delivery of health services),
nutrition, industry, agriculture, and even some atomic energy
research. I shall touch briefly on agricultural research, because
I know it best and because it is well documented.

The founding and financing of the
International Agricultural Research Centers is an institutional
innovation of a high order. The entrepreneurship of the
Rockefeller Foundation in cooperation with the government of
Mexico first launched this type of venture. But these centers,
good as they are, are not a substitute for national agricultural
research enterprises. Suffice it to give the flavor of the
remarkable increases in the number of agricultural scientists
between 1959 and 1974 in 22 selected low income countries. All
told the number of scientist man years devoted to agricultural
research in these 22 countries increased more than three times
during this period. By 1974 there was a corps of over 13,000
scientists, ranging from 110 in the Ivory Coast to over 2,000 in
India (Boyce and Evenson, 1975). Indian agricultural research
expenditures between 1950 and 1968 also more than tripled in real
terms.

We come to the bottom line. In India this
investment in agricultural research has produced excellent
results. An analysis by states within India shows the rate of
return has been approximately 40 percent, which is indeed high
compared to the returns from most other investments to increase
agricultural production (Evenson and Kislev, 1975).

Concluding remark
While there remains much that we do not know about the economics
of being poor, our knowledge of the economic dynamics of low
income countries has advanced substantially in recent decades. We
have learned that poor people are no less concerned about
improving their lot and that of their children than those of us
who have incomparably greater advantages. Nor are they any less
competent in obtaining the maximum benefit from their limited
resources. The central thrust of this lecture is that population
quality and knowledge matter. A goodly number of low income
countries have a positive record in improving population quality
and in acquiring useful knowledge. These achievements imply
favorable economic prospects, provided they are not dissipated by
politics and governmental policies that discriminate against
agriculture.

Even so, most of the people throughout the
world continue to earn a pittance from their labor. Half or even
more of their meager income is spent on food. Their life is
harsh. Farmers in low income countries do all they can to augment
production. What happens to these farmers is of no concern to the
sun, or to the earth, or to the behavior of the monsoons and the
winds that sweep the face of the earth. Farmers' crops are in
constant danger of being devoured by insects and pests. Nature is
host to thousands of species that are hostile to the endeavors of
farmers, especially so in low income countries. We in the high
income countries have forgotten the wisdom of Alfred Marshall,
when he wrote, "Knowledge is the most powerful engine of
production; it enables us to subdue Nature and satisfy our
wants."

and Tomes, Nogel. "Child Endowments
and the Quantity and Quality of Children." Journal of
Political Economy 84, Part 2 (August 1976): Sl42-S162.

Boyce, James K., and Evenson, Robert
E. National and International Agricultural Research and
Extension Programs. New York: Agricultural Development
Council, 1975.

Evenson, Robert E. "The Organizaion of
Research to Improve Crops and Animals in Low Income
Countries." In Distortions of Agricultural Incentives, edited
by Theodore W. Schultz, pp. 223-45. Bloomington, Ind.:
Indiana University Press, 1978.

and Kislev, Yoav. Agricultural
Research and Productivity. New Haven: Yale University Press,
1975.

Government of India, Planning
Commission. Draft Five Year Plan 1978-83, 1978.

"On the Economics of the Increases in
the Value of Human Time Over Time." In Measurement, History
and Factors of Economic Growth, edited by R.E.O. Matthews.
Fifth World Conference of the International Economic
Association, Tokyo, Japan, August 1977b. London: Macmillan,
in press.

"What Are We Doing to Research
Entrepreneurship?" In Transforming Knowledge into Food in a
Worldwide Context, pp. 96-105. Minneapolis, Minn.: Miller
Publishing Company, 1978a.

"Investment in Population Quality
Throughout Low-Income Countries." In World Population and
Development: Challenges and Prospects, edited by Philip M.
Hauser, pp. 339-60. Syracuse: Syracuse University Press,
1979a.

Usher, Dan. "An Imputation to the
Measure of Economic Growth for Changes in Life Expectancy."
In The Measurement of Economic and Social Performance, edited
by Milton Moss, pp. 193-226. New York: National Bureau of
Economic Research, 1978.

* I am indebted
to Gary S. Becker, A. C. Harberger, D. Gale Johnson and T. Paul
Schultz for helpful suggestions on the first draft of this paper.
My debt to Milton Friedman is especially large for his
painstaking expositional comments. I am also indebted to my wife,
Esther Schultz, for her insistence that what I thought was stated
clearly was not clear enough.